To protect against litigation and losses, investors will require residential funders to certify that the points and fees charged to borrowers do not exceed the 3% cap in the qualified mortgage rule, according to a regulatory expert.
Anne Canfield said private investors will seek to obtain representations and warranties from lenders and conduct due diligence to ensure the fee calculations were done correctly.
“If it’s not done correctly, the loan becomes a non-QM loan,” said the president of Canfield & Associates. If the mortgage is not covered under the regulation, the funder will not enjoy a legal safe harbor that shields the firm from litigation if the loan goes bad, she noted.
Due to the compliance issues created by the QM rule that the Consumer Financial Protection Bureau is drafting, investors and guarantors will probably review the lender’s work sheets that were used to calculate the points and fees.
“I assume Fannie Mae, Freddie Mac and Ginnie Mae are all going to want to know that this was done correctly,” she said.
Canfield expects investors will conduct due diligence on 10% of the loan pool to test for compliance with the 3% cap.
In drafting the QM rule, the CFPB should ensure that any compensation or fees included in the 3% cap are actually known at the time of closing. “Lenders can’t ‘rep and warrant’ what they don’t know,” Canfield said.
The CFPB is expected to issue the final QM rule in January.